An
Economic Forecast for 2023-24
How excessive government spending, burgeoning debt and out-of-control inflation are leading to an unavoidable economic crisis.
By Jim
Hingst
Jim Hingst is a contributing writer for Sign Builder Illustrated magazine.
Some
believe that the flutter of a butterfly’s wing in another part of the world can
initiate a complex chain of incidents that can lead to a catastrophe. Now imagine
the worst possible combination of financial conditions culminating in a chain
reaction unleashing an economic disaster.
That chain
of events started during the pandemic shutdown as the federal government pumped
$4 trillion into the economy. Subsequently, Congress authorized another $1.9
trillion. That stimulus spending fueled inflation which topped 9% in 2021
according to government statistics.
In an attempt to put the genie back into the
bottle the Federal Reserve has raised rates nine times in the last year. The
Fed now faces a “Catch 22.” If the Fed does not continue to raise rates,
inflation will never fall below 5%. On the other hand, increasing rates will
tighten credit which will ultimately lead to businesses failing to meet revenue
expectations and contributing to rising unemployment. Tight lending standards
also hamper your ability to obtain a loan either as a consumer or as a small
business owner.
These are a few of the financial conditions
climaxing in a perfect storm which will result in an unavoidable downturn in
the economy. The real tragedy is that the impending recession
could have been circumvented had our leaders and bureaucrats made different
decisions.
According
to Ronald Regan, the lesson that we should have learned was that “government is
not the solution to our problem; government is the problem.”
How the Graphics
Market is Affected.
What is worrisome
for companies in the graphics market is that when the overall economy slows and
businesses experience lower earnings, they reduce expenses. The first items
that companies cut from their budgets are advertising and marketing
expenditures. While that may be a good business decision, it is bad news for
sign shops and printers.
As a business owner you should be aware of
the key indicators of an imminent economic contraction:
● Negative GDP
● Federal Reserve Interest Hikes
● Bank Failures
● Tightening
Lending Standards
● Declining Home Sales & Home Values
● Plummeting Consumer Spending
● Unemployment Rate & Labor Participation
Rate
“For thirteen consecutive months the leading economic
indicators have been on a declining trajectory,” says Greg McKay, VP of Earl
Mich Company. This current trend mirrors the direction of indicators prior to
the 2008 recession – which doesn’t augur well for economic growth later this
year.
“Worsening
factors such as interest rates, orders for consumer goods, manufacturing output
and building permits signal a decrease in GDP growth in the months ahead,” McKay
says. “As the economy weakens, the more vulnerable businesses could suffer a dismal fate if
they don’t get their financial houses in order.”
Are
Recession Predictions Overinflated?
Based
on the March Consumer Price Index (CPI) inflation has decreased from 6% in
February to 5% in March. That’s better than the high of 9% in June of last year
which was a 40-year high, but that’s a far cry from the low inflation numbers
under President Trump and much higher than the Fed’s target of 2%.
While the Bureau
of Labor Statistics is touting the current CPI of 4.9%, the overall cost of
groceries in the last year has risen steeply by 11.3%. This average for the
increase in food prices is very deceiving. Cost of staples such as eggs, bread,
bacon, butter, margarine, milk and poultry are significantly higher. In some
cases, prices have doubled for some food prices in the last year. Prices for
used cars and gasoline have also grown well above the CPI. What’s more, when housing is subtracted
from the CPI, core inflation clearly has not abated.
To
cure our economic maladies the Fed has prescribed the bitter medicine of
raising interest rates. Tightening interest rates portend a painful recovery
which will impact consumers and small businesses.
As much as Fed Chairman Jerome Powell would
like to paint a rosy picture projecting that the US economy will avoid a deep
recession, don’t bet on it. When has the Fed ever been able to choreograph a
soft landing? Never!
Higher rates also affect consumer spending as
households tighten their belts, with lower economic classes more greatly
burdened. Lower consumer spending ripples through the economy distressing all
businesses. GDP this year is already an anemic 1.1%.
“High interest rates have affected the RV
market and slowed what had been a booming segment of the graphics market,” says
Guy Leigh, Executive
Vice President of Sales for Nekoosa Coated Products.
The slowing economy inevitably will result in
what some “bearish” economists predict will
be a protracted recession that will last through 2024. As the Fed aggressively increased rates, business loans have become
more expensive. Consequently, shops are making more judicious decisions on expenditures
on facilities expansion, equipment purchases, new hires and inventory.
That’s exactly what the Fed wants. The
purpose of raising rates is to reduce demand for products and services. As the
Fed hikes interest rates to combat inflation, higher rates can be a bitter pill
for you and your business to swallow. Market investments and retirement
accounts could likely take a loss. Sales will slow. Jerome Powell has even
suggested that higher unemployment is necessary to turn the economy around.
The Fed is trying
to thread the needle: curtail inflation without causing the economy to stall
and go into a tailspin. It is unlikely, however, that further rate hikes will
significantly lower inflation until the federal government controls its
reckless spending.
In fact, the worst
possible scenario may occur: high inflation causing rising prices for
groceries, cars and homes; tighter credit; and an increase in unemployment as
businesses tighten their belts in order to weather the recession. It’s called
stagflation. Since our country’s leadership has forgotten these days of malaise
under Jimmy Carter, we are doomed to repeat history, to paraphrase Spanish
essayist and philosopher George Santayana.
Bank On More Bank
Failures.
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Rising interest rates have been deleterious
for the banking sector. As a rule of thumb, when interest rates rise, bond
yields fall. When there was a run on deposits, some regional banks had to cash
in their securities at a loss. When the banks could not cover the withdrawals,
they became insolvent.
This contributed to the recent bank failures
of Silicon Valley Bank, Signature Bank and First
Republic Bank. This potentially is just the beginning of the banking crisis
with more dominos likely to tumble. Other banks precariously teetering at the
edge of the financial abyss include Comerica Bank, KeyBank and First Horizon. Financial analysts
believe that between 100 and 200 regional banks are currently in distress.
The Fed’s delay in
raising rates made a bad situation worse. Instead of raising rates gradually,
kneejerk increases did not allow regional banks sufficient time to react
quickly enough to fluctuations in the bond market. Banks incurred huge losses
resulting in failures.
While regional
banks have struggled as the Fed has raised rates, some of the larger banks,
such as JP Morgan Chase and Citi Bank have realized comparatively significant
profits. In part, what accounts for their healthy financial position is that
they raised their rates on loans in a timely manner from 4% to 6%. Of course,
the same institutions did not correspondingly increase rates on deposits.
The Federal
Reserve owns much of the blame for the banking crisis. Whether the Fed was just
complacent in their response to inflation or they failed to recognize the
severity of the problem, they nevertheless allowed inflation to get out of
control.
Bankers and bank
regulators, of course, deserve a large part of the blame. Regulators had pushed
treasury bonds and bankers made risky investments. This coupled with panicking
depositors moving their assets exacerbated the problem for regional banks. What
could these banks do once there was a run on deposits? Banks were in no
position to increase interest rates to a level that would allay the fears of
anxious depositors because their margins were already slim. What’s more, how
can bank rates compete with the 5.94% rate now available on 4-week T-bills?
Undoubtedly, as
regional banks tighten lending standards, securing a loan will become more
difficult not only for consumers but for small businesses, such as sign shops
and wide format printers. That’s a
problem for the whole country because small businesses are not expanding, which
means they are not buying new equipment, enlarging existing facilities,
renewing leases or hiring new employees.
In fact, small
businesses employ nearly half of the workers in the private sector. When these
companies stop hiring, higher unemployment soon follows. That’s generally the
last stage in a recession. This causes an economic ripple that affects sales of
existing homes and housing starts as well as employment in the construction
sector and building materials sales. It’s a perfect example of how the
butterfly effect works.
Supply Chain Issues.
You
can blame the Fed for many of our country’s financial maladies. Some factors,
however, were beyond their control. During the pandemic, for example, the low
supply of new and used cars, not more demand drove prices higher.
The Covid pandemic-related factory shutdowns
were partly responsible for delays in fulfilling order. Shipments from foreign
suppliers also contributed to delays. Some shops also reduced inventory levels
in an effort to improve their working capital which added to backorders. Other
causes of supply chain problems include raw material shortages; higher shipping
costs driven by higher fuel prices; forecasting miscalculations; labor
shortages; and unpredictable changes in customer buying behavior.
Are Real Estate
Problems for Real?
Home sales and housing starts are good
barometers for the country’s economic future. In March of 2023 building permits
for new home construction decreased nearly 25% from March of last year. The
jump in mortgage rates, supply chain problems and the high cost of building
materials largely accounted for the decline.
Decline in existing home prices. During many previous recessions home prices
plummeted. This may not occur to
the same degree during the 2023-24 recession. One reason is that the inventory of available
housing (or supply) still remains low. In fact, real estate inventory has not been so
low since the 2008 Great Recession.
During the pandemic investments banks purchased a significant share
of single-family homes as rental units. What’s more, housing starts are at their
lowest point in the last 60 years. One silver lining radiating around the
ominous economic clouds is growing-demand among first-time home buyers entering the market.
What could deter
both buyers and sellers are
mortgage rates which have gone through the roof. In the last couple of years rates shot up
from less than 4% to 7% which will contribute to slower sales of existing homes
as well as encumbering new home construction. As long as
inflation remains high, the Fed will continue to hike rates through 2023 and
mortgage rates will continue to rise.
The likely result is a stagnant market. Current property owners have adopted a wait and see attitude –
deciding to stay put in their current homes with affordable mortgage
rates.
Any decline in
prices, which will vary from one region to another, should be between 5% and
10% at the very least. This should disappoint anyone looking for bargains at
the expense of another’s misfortunes. Any prudent evaluation of real estate
prices should include a comparison of current prices versus pre-pandemic
prices.
Real estate sales
are generally sluggish and home values are stable because of limited supply and
high mortgage rates. There are some exceptions. Markets such as Austin, Texas
and Boise, Idaho have experienced rapidly declining home prices between 15% and
20% in the last 10 months. These outliers, whose economies in both cities were
heavily reliant on the tech sector, have experienced significant layoffs. Other
regions experiencing losses in home values include communities in the Western
part of the country.
In past years
real estate has been a reliable hedge against inflation. Investors could
generally expect increases in property valuation as well as a dependable
revenue stream from rentals. For example, recent returns from real estate
investment trusts or REITs ranged from 15% to 21% outpacing inflation.
Are real estate investments still a safe bet as the nation heads
into recession? Maybe not! The bankruptcy of Lehman
Brothers, which had invested heavily in risky mortgages, should have given
today’s investment bankers pause. Lehman’s
failure was the first domino to fall causing an economic chain reaction in
large part responsible for the Dow losing more than 50% of its value in 2008.
Could behemoth investment firms with significant real estate assets face the same fate as Lehman? The problem with real estate
investments is liquidity. You can find yourself behind the eight ball if you are
short on cash needed to cover financial obligations. What can you do if your
assets are tied up in property and nobody is buying? Is this one reason
institutional investors have purchased approximately 50% fewer homes in 2023
than the previous year?
Commercial Real
Estate Problems. Regional banks consider commercial real estate as their
top risk. As commercial leases expire this year, many tenants facing falling
sales and cash flow problems will likely look for less expensive property. This
creates a problem for commercial landlords with a high percentage of empty
space. If the banks’ creditors default on loans, it could leave banks with
heavy exposure on the hook.
Problems in Store
for Retailers.
For the first five months of 2023 retail sales have weakened. In fact, 2023 retail sales are down more than 20% from last year which should represent that so-called “canary in the coal mine” indicating a faltering economy.
The significance
of a weak retail market is that consumer spending typically accounts for 70% of
the U.S. GDP. The corresponding decline in earnings affects expenditures in
other market sectors. According to Warren Buffet the shockwave of slumping
retail sales ripples throughout the economy. For example, lower sales in retail
affects the amount of goods shipped in the railroad industry.
As the ripple
effect spreads throughout the economy, companies large and small look for ways
to cut their shop and administrative expenses including layoffs of
non-essential and less productive employees.
As consumer
spending wanes and interest rates continue to increase, sales for many small
business sectors will falter. Not only will smaller businesses fail but larger
corporations could also face bankruptcy.
Well-known businesses are not immune from the perils of a slowing
economy. Companies on the ropes include:
Bed, Bath & Beyond
JOANN (formerly Jo-Ann Fabrics)
AMC (movie chain)
Dollar General
Rite Aid
The Gap
Kohl’s
Revlon
Serta Simmons Bedding
Wayfair
Food for Thought. You might assume
that supermarkets are impervious to downturns in the economy. Everyone eats so
shouldn’t grocers be rolling in dough? Higher real estate rental costs as well
as higher property taxes have increased overhead and decreased profits leading to
growing store closures especially in major metro markets. Inflation and the
fear of recession have also impacted buying behavior in the food sector. While
demand has increased, revenues for some stores have declined as shoppers make
more frugal purchasing decisions. Grocery retailers forced to shutter locations
include well-known chains such as Aldi’s, Piggly Wiggly, Stop & Shop, Save
A Lot and Big Lots.
Restaurant Chains Chain Their Doors. Draconian Covid
restrictions devastated business for many popular restaurant chains. While many
have reopened following the pandemic, a significant number of dining chains are
closing locations because of higher operating costs, staffing difficulties and supply
chain issues. Because inflation remains high many consumers have decided to
save money and cook their own meals. Restaurant chains reportedly closing
unprofitable locations include Steak n Shake, Applebee’s, Red Lobster, Hooters,
Taco Bell, TGI Fridays, Subway and Boston Market.
Up to Our Necks in
Debt.
Some people argue that debt can
be a good thing. In their minds debt is a great way to redistribute money to
keep the economy vibrant. Point well taken. Without incurring debt most people
cannot afford to buy a home, a new car, furniture or appliances.
In fact, by buying on credit
the consumer gets what he or she wants which keeps businesses producing
products and services. What’s more, sales on credit helps companies buy new
equipment, expand their facilities and hire new employees.
The problem with debt comes
when you borrow so much that you can’t service the debt.
Consumer Debt. A high level of
consumer spending in a large part has sustained the growth of the U.S. economy.
Compared to other countries, Americans spend more and rely on credit more than
other nations such as Japan. The result is that we have enjoyed a higher
standard of living with bigger homes and more luxurious home furnishings, more
appliances and expensive cars. Americans
have also enjoyed more money to spend on non-durable goods and entertainment.
Here's the problem. Approximately
three-quarters of Americans have some debt. That’s not surprising! That debt
could include car loans, student loans or balances due on credit cards. What’s startling is that consumer debt in the
U.S. is about $4 trillion not including home mortgages. In fact, 1 out of 3
Americans now experience credit problems.
When a large percentage of the population has
a hard time paying their bills it stifles consumer purchasing, a major economic
driver. As consumers tighten their belts, they
spend less. When business income
decreases, they also spend less and production declines.
National Debt. In January 2023 our national debt exceeded $31 trillion – more than any other country. By way of definition, a country increases its debt when it spends more than its tax revenue. That should concern you for a number of reasons. Here’s why.
There are only two
rational ways to reduce our country’s debt: (a) cut spending on government
programs, and (b) raise taxes. There is no (c) unless you consider defaulting
on the national debt or printing so much money that the U.S. dollar becomes
worthless!
The smartest
option is to cut discretionary government spending. The biggest obstacle to
cutting the federal budget is that Congress members have pet projects that they
are invariably unwilling to cut.
40 years ago, Nobel
laureate Milton Friedman recommended that politicians cut all of these programs
by an equal amount to reduce the deficit to circumvent the squabbling and impasses
in negotiation. In fact, Friedman suggested a 10% across the board cuts. As
sensible as this recommendation is, our politicians have decided to kick the
debt can down the road increasing the debt ceiling year after year without
appropriate spending cuts.
Not only has the
failure to tackle the debt problem burdened the country’s economy, it has
eroded confidence among consumers and businessmen in our financial system. In
addition, every time Congress increases the debt limit it correspondingly puts
pressure on the Fed to raise interest rates. Every time interest rates grow the
economy starts to slow.
As the cost of
money goes up and it becomes more difficult to secure credit, businesses can’t
buy new equipment and hire new people. What’s more, sales and profits decrease.
The ripple spreads through the economy.
Conclusion: When
Troubles Come…
Shakespeare said
it best: “When troubles come, they come not as single spies but in battalions.”
Our economy is facing the proverbial perfect storm of our own making: reckless government
spending fueling inflation; supply chain problems; tightening of credit
standards and constraints on the oil industry increase prices not only at the pump but
throughout the economy.
To weather
the impending economic storm, here are some actions that your business can
take:
● Protect your
business base. Maintain contact with your key customers at least once a month.
Probe for new opportunities and be alert for any areas of dissatisfaction.
● Review your
shop and administrative expenses monthly with an eye to reduce unnecessary
expenditures.
● Monitor your
cash flow weekly. Make sure that your income offsets any expenditures. Maintain
a sufficient cash reserve to cover possible shortfalls.
● Pay off your
debts in a timely manner.
● Delay
purchases of new equipment, vehicles and facilities until the economic storm
subsides.
“In my career I have been through at least four recessions,” says Butch
Anton of Superfrog Signs and Graphics in Moorhead, MN. “One of the quickest
ways for businesses to tighten their belts and weather an
economic downturn is to cut staff. It’s never pretty. But it’s going to
happen again.”
As I wrote in an
earlier article, downturns in the economy are inevitable. (Read "Surviving the Next Recession.") Since the end of WWII,
the U.S. has experienced nine recessions. Will your business survive?
“When times are
tough you need to be vigilant about threats to your business. Salespeople
should stay in front of their customers to fend off competitors,” says
Nekoosa’s Guy Leigh. “If you aren’t paying attention to your account base, your
competitors will. That can result in account attrition.”
Although recessions
are inescapable, Leigh adds, “Always remember that tough times don’t last.
Tough people do.”
Read these other articles by Jim Hingst:
Harvesting More Leads from Social Media
Measuring the Success of Business Plans
Developing a Sales and Marketing Plan
Crafting Your Digital Marketing Message
© 2023 Jim Hingst, All Rights Reserved
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